Indexers want to index everything says Kristen Mierzwa, Head of Digital Assets, Index Investments Group, FTSE Russell.
2017 saw the firm turning its attention to digital assets and private equity. “We still haven’t cracked private equity,” she says, “but digital assets have robust figures.”
The problem with private equity is that it is not listed, and it is hard to get transparent pricing, she explains. “But with digital assets, because they are trading on 450 odd exchanges, there is transparency in the market for those assets.”
FTSE Russell started to look for a pricing partner for building a digital index range and joined forces with Digital Asset Research (DAR), a specialist data farm focused entirely on institutional clients.
DAR’s CEO Doug Schwenk explains that in 2017 lots of people were trying to navigate the crypto market. “It was so retail driven, but we were thinking about how to navigate custody, settlement, valuation, investability, asking what are these different use cases for these assets.”
At the time there was a boom in ICO issuance, with lots of different style assets being used for different purposes but now, Schwenk feels, it’s become even more complicated as the landscape has become more crowded with more assets reaching a level of maturity which, he says, makes them interesting.
“In 2017 you had three to five assets that had enough liquidity and market capitalisation in which you could invest as an institution,” Schwenk says. “Now there are many more and the overall market capitalisation of the space has increased from maybe USD100 billion to USD trillions – it’s a very different universe that may now be appealing to someone who wants to have a larger position and we work from the perspective of an institutional client who may have a portfolio size of USD1 billion and up.”
Schwenk also observes that lots of institutional managers are being questioned by their investors on why they are not involved in digital currencies.
“Five years ago, they saw digital assets opportunistically but there has been a change in how they are viewed from a reputational standpoint – there has been a generational shift as well, with younger clients asking for this in their portfolios so those pressures come to bear today.”
The digital index range with FTSE Russell has been under construction since 2018 and has just been commercialised, at the end of 2021. Initially the range was half a dozen, but as the sector has grown, so has the number of indices, with DAR now providing digital currency data for 30 indices.
“It’s been a long time in a proof-of-concept process and trying to get the London Stock Exchange and the regulators comfortable with this,” Schwenk says.
The uptake is steady, he says, with no ETFs as yet, but a number of clients who have that as an end goal, once regulatory hurdles in the US and the UK in particular, have been cleared.
Schwenk admires the innovation in the digital space that has been experienced in Europe. “The Swiss regulator has been pushing innovation which is great for this space and helps to prove that these kinds of products can exist and have uptake across a variety of assets. It’s a nice foreshadowing for what may come to larger and more accessible markets.”
Mierzwa says that FTSE Russell’s plan all along was to be ready with a market infrastructure once the regulators were comfortable with the space. The leg work has been done, she says.
“We are ready and we can keep this data and store and build a history, so we are happy with the pace at which things are going and comfortable with our process.”
Looking at Europe, Mierzwa says she admires the work that has been done there. “You have to admire these players,” she says. “There was such a sense of all boats rise together in the ETF business back in the 1990s and there is that team spirit with the digital asset community now – they are all pulling together to make this work.”
Schwenk congratulates FTSE Russell on its five years of working on creating digital indices. “They have been very deliberate and careful, bringing lots of structure and governance, vetting the pricing providers and making sure the product is well tested and has a lot of support. They haven’t rushed to market so there is an opportunity for bigger long-term outcomes.”
He compares this approach with the S&P issue of a crypto index in 2021, commenting that that offering was ‘somewhat half-baked’ including assets that were not investable.
“They threw them all in with a ‘see what happens’ approach and some of the assets in their basket don’t have a strong network and developers’ support.”
Schwenk comments that the regulators in the US and the UK have been very clear that the vetting of the underlying assets was the most important thing to do.